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share of nonbusiness income from partnerships

DEDUCTIONS

Qualified small business. A qualified small

Net loss from business (gross

and S corporations.

business is a sole proprietorship or a partner-

income of $67,000 minus expenses

ship that has average annual gross receipts

Do not include on line 7 the income you

of $72,000) . . . . . . . . . . . . . . . . .

$5,000

(reduced by returns and allowances) of $5 mil-

receive from your trade or business or your

Net short-term capital loss

lion or less during the 3-year period ending with

employment. This includes salaries and wages,

on sale of stock . . . . . . . . . . . . . .

1,000

the tax year of the NOL. If the business did not

self-employment income, and your share of

Standard deduction . . . . . . . . . . .

5,150

exist for this entire 3-year period, use the period

business income from partnerships and S cor-

Personal exemption . . . . . . . . . . .

3,300

the business was in existence.

porations. Also, do not include rental income or

Glenn’s total deductions

$14,450

ordinary gain from the sale or other disposition

Glenn’s deductions exceed his income by

Farming loss. The carryback period for a

of business real estate or depreciable business

$10,800 ($14,450 − $3,650). However, to figure

farming loss is 5 years. Only the farming loss

property.

whether he has an NOL, certain deductions are

portion of the NOL can be carried back 5 years.

not allowed. He uses Schedule A (Form 1045) to

A farming loss is the smaller of:

Adjustment for section 1202 exclusion (line

figure his NOL. See the illustrated Schedule A

17). Enter on line 17 any gain you excluded

(Form 1045), later.

1. The amount that would be the NOL for the

under section 1202 on the sale or exchange of

The following items are not allowed on

tax year if only income and deductions at-

qualified small business stock.

Schedule A (Form 1045).

tributable to farming businesses were

taken into account, or

Nonbusiness net short-term capital

Adjustments for capital losses (lines 19 – 22).

2. The NOL for the tax year.

loss . . . . . . . . . . . . . . . . . . . . . . . . $1,000

The amount deductible for capital losses is lim-

Nonbusiness deductions

ited based on whether the losses are business

(standard deduction, $5,150) minus

Farming business. A farming business is a

capital losses or nonbusiness capital losses.

nonbusiness income (interest, $425) . .

4,725

trade or business involving cultivation of land,

Deduction for personal exemption . . . .

3,300

raising or harvesting of any agricultural or horti-

Nonbusiness capital losses. You can de-

cultural commodity, operating a nursery or sod

duct your nonbusiness capital losses (line 2)

Total adjustments to net loss

$9,025

farm, raising or harvesting of trees bearing fruit,

only up to the amount of your nonbusiness capi-

nuts, or other crops, or ornamental trees. The

tal gains without regard to any section 1202

Therefore, Glenn’s NOL for 2006 is figured

raising, shearing, feeding, caring for, training

exclusion (line 3). If your nonbusiness capital

as follows:

and management of animals is also considered

losses are more than your nonbusiness capital

gains without regard to any section 1202 exclu-

a farming business.

Glenn’s total 2006 income . . . . . . .

$3,650

sion, you cannot deduct the excess.

A farming business does not include contract

Less:

harvesting of an agricultural or horticultural com-

Glenn’s original 2006

Business capital losses. You can deduct

total deductions . . . . . . $14,450

modity grown or raised by someone else. It also

your business capital losses (line 11) only up to

Reduced by the

does not include a business in which you merely

the total of:

disallowed items . . . . . . − 9,025

− 5,425

buy or sell plants or animals grown or raised by

•

Your nonbusiness capital gains that are

Glenn’s NOL for 2006 . . . . . . . . . .

$1,775

someone else.

more than the total of your nonbusiness

Certain timber losses. Income and deduc-

capital losses and excess nonbusiness

tions attributable to qualified timber property

deductions (line 10), and

(defined below) can be treated as attributable to

When To Use an NOL

•

Your total business capital gains without

a farming business if any portion of the property

regard to any section 1202 exclusion (line

is located in the GO Zone, Rita GO Zone, or

12).

Generally, if you have an NOL for a tax year

Wilma GO Zone.

ending in 2006, you must carry back the entire

However, these rules apply only to a timber

amount of the NOL to the 2 tax years before the

Domestic production activities deduction

producer who:

NOL year (the carryback period), and then carry

(line 23). You cannot take the domestic pro-

forward any remaining NOL for up to 20 years

1. Held qualified timber property on the appli-

duction activities deduction when figuring your

after the NOL year (the carryforward period).

cable date below:

NOL. Enter on line 23 any domestic production

You can, however, choose not to carry back an

activities deduction claimed on your return.

NOL and only carry it forward. See Waiving the

a. August 28, 2005, if any portion of the

Carryback Period, later. You cannot deduct any

property is located in the GO Zone,

NOLs from other years (line 24). You cannot

part of the NOL remaining after the 20-year

b. September 23, 2005, if any portion of

deduct any NOL carryovers or carrybacks from

carryforward period.

the property is located in the Rita GO

other years. Enter the total amount of your NOL

Zone (but not in the GO Zone), or

NOL year. This is the year in which the NOL

deduction for losses from other years.

occurred.

c. October 23, 2005, if any portion of the

Illustrated Schedule A (Form

property is located in the Wilma GO

Exceptions to 2-Year

1045)

Zone (but not in the GO Zone or the

Carryback Rule

Rita GO Zone); and

The following example illustrates how to figure

Eligible losses, farming losses, qualified GO

2. Did not hold more than 500 acres of quali-

an NOL. It includes filled-in pages 1 and 2 of

Zone losses, and specified liability losses, de-

fied timber property on the applicable date

Form 1040 and Schedule A (Form 1045).

fined below, qualify for longer carryback periods.

above.

Example. Glenn Johnson is in the retail re-

Qualified timber property is property that

Eligible loss. The carryback period for eligible

cord business. He is single and has the following

contains trees in significant commercial quanti-

losses is 3 years. Only the eligible loss portion of

income and deductions on his Form 1040 for

ties. It can be a woodlot or other site that you

the NOL can be carried back 3 years. An eligible

2006.

own or lease. The property qualifies only if it

loss is any part of an NOL that:

meets all the following requirements.

•

INCOME

Is from a casualty or theft, or

•

It is located in the United States.

Wages from part-time job . . . . . . . .

$1,225

•

Is attributable to a Presidentially declared

•

Interest on savings . . . . . . . . . . . . .

425

It is held for the growing and cutting of

disaster for a qualified small business.

Net long-term capital gain on sale of

timber you will either use in, or sell for use

real estate used in business . . . . . . .

2,000

in, the commercial production of timber

An eligible loss does not include a farming

Glenn’s total income

$3,650

loss or a qualified GO Zone loss.

products.

Publication 536 (2006)

Page 3

Publication 536 - Net Operating Losses (Nols) For Individuals, Estates, And Trusts - Internal Revenue Service - 2006 Page 3

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